The key laws and regulations that govern mergers and acquisitions
Mergers and acquisitions in India are governed by the following main legislation:
- The Companies Act 2013
- The Competition Act 2002
- The Foreign Exchange Management Act 1999 (In case of cross border merger).
- SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011.
- The Income Tax Act 1961
- Indian Stamp Act 1899
The government regulators and agencies that play key roles in mergers and acquisitions
Following government regulators and agencies play key roles in the process of mergers and acquisition in India:
- Registrar of Companies and Regional Director under Ministry of Corporate Affairs
- National Company Law Tribunal (NCLT)
- Competition Commission of India (CCI)
- Securities and Exchange Board of India (SEBI)
- Reserve Bank of India (RBI)
- The Income Tax Department (ITD)
Laws may restrict or regulate certain takeovers and mergers (For example, anti-monopoly or national security legislation).
A transaction that causes appreciable adverse effect on competition is void under the Competition Act 2002 (“Act”). Any acquirer entering into a transaction above a specified threshold is required to give a notice to the Competition Commission of India (‘CCI’) disclosing the details of such transaction. If the CCI is of the view that the transaction might cause an appreciable adverse effect on competition, it will direct that the transaction not to take effect.
Where the CCI feels that certain modifications in the transaction might prevent an appreciable adverse effect on the competition, it shall direct the acquirer to make such modifications. The acquirer may accept the modification or make amendments which will have to be approved by the CCI. Further, the CCI has power to make inquiries in case of certain agreements, abuse of dominant position
or any combination thereof. Additionally, the CCI has the power to impose penalties in case of any offence under the Act.
Documentation required to implement these transactions
Documentation will depend on the nature of transaction. However, generally the following documentation will be required:
- Documents for obtaining approval from the Board of Directors and Shareholders of both the acquirer and target company, wherever applicable
- Scheme/Petition to be filed before the concerned authority
- Notices to the shareholders and creditors
- Consent from the shareholders and creditors
- Notice to be published in newspaper
- Public Announcement in case of acquisition of shares of a listed company
- Various affidavits, declarations and other documents
- Share subscription/ purchase agreement
- Share Transfer form and
- Reporting to stock exchanges in a prescribed format in case of a listed company, as applicable
Government charges or fees apply to these transactions
The following government charges/ fees shall apply, as applicable:
- Fee for filing merger petition before NCLT
- ii. Share transfer stamp duty on consideration for acquisition of shares where shares are held in physical form
- iii. Fee payable to the Regional Director/ Registrar of Companies on filings the forms/ application
- iv. Stamp duty on Share Purchase/Subscription agreement, Affidavits, merger order, etc. as applicable
- v. Fee payable to notary for notarisation of affidavits/ undertakings
Shareholders have consent or approval rights in connection with a deal
In case of a scheme of merger, approval from the shareholders of respective companies shall be require. However, where written consent of the shareholders has already been file along with the merger petition before the NCLT, the NCLT may dispense with the requirement of convening a shareholders meeting at its discretion. In case of acquisition of shares, the Indian acquirer company may be required to obtain approval of the shareholders where its total investment is in excess of the threshold provided under Indian laws in this regard. Where the acquirer is a foreign company, the requirement of shareholders’ approval
shall be govern by the laws of its overseas jurisdiction.
Conditions be attached to an offer in connection with a deal
In India, it is open for the parties entering into a deal to negotiate and agree upon the terms and conditions of the deal. Some of the common conditions attached to an offer in connection with a deal are the fulfilment of the conditions precedent and subsequent (findings of the comprehensive due diligence exercise), lock-in period of the securities, restriction on transfer of shares and affirmative voting rights to be provide to the investor. In case of acquisition of a listed company, the Securities and Exchange Board of India
(Substantial Acquisition of Shares and Takeovers) Regulations 2011, requires the acquirer to make an open offer conditional as to the minimum level of acceptance
Any industry-specific rules that apply to the company being acquired
he industry specific rules that apply to the company being acquire depends on the particular sector to which the company falls. Typically, the said rules apply to highly regulated sectors or sectors of strategic importance, such as banking, financial services, insurance, media, telecommunications, defence, civil aviation, electricity etc. Accordingly, sector-specific regulators have been establish to regulate some of the aforesaid industries, e.g. the Telecom Regulatory Authority of India and the Department of Telecommunications regulate the telecommunications sector, the Directorate General of Civil Aviation regulates civil aviation, the Reserve Bank of India regulates the banking and financial services sectors, the Insurance Regulatory and Development Authority regulates the insurance sector, and
the Ministry of Information and Broadcasting regulates the electronic media sector.
Further, the Foreign Direct Investment Policy, the Foreign Exchange Management Act 1999 and its regulations contain industry specific rules such as the permissible limit of foreign investment, entry routes etc.
Cross-border transactions subject to certain special legal requirements
The Companies Act 2013 contains provisions pertaining to inbound and outbound mergers and amalgamations. The provision envisages a scheme of amalgamation providing for, amongst other things, payment of consideration, including by way of cash or depository receipts or a combination of both.
The Foreign Direct Investment Policy provides that foreign investment in India can be make either with or without the approval of the Reserve bank of India. Further, the rules and regulations framed by
the Reserve Bank of India under the Foreign Exchange Management Act 1999 will be applicable to cross border transactions in India.
The Foreign Direct Investment Policy prescribes certain conditions for making investments in India in different sectors, such as maximum permissible limits on investment by a foreign party, pricing guidelines to be adher
to for making the investments, lock-in requirements of such foreign investment, etc.
Minority shareholders be squeezed out. If so, procedures must be observed
The Companies Act 2013, contains provisions for squeezing out of minority shareholders form the company.
The Act requires an acquirer holding 90% (ninety percent) or more of the issued equity shares in a company, to make an offer to the minority shareholders to buy the equity shares held by such minority shareholders in the company and
the minority shareholders may sell their equity shares to the majority shareholders at the price determined on the basis of valuation by a registered valuer.
The procedure for the same has been detail here under:
- The acquirer holding at least 90% (ninety percent) of the shares will be require to notify the company of their intention to buy the minority shares
- The majority shareholders will have to make an offer to the minority shareholders to buy their equity shares at the price determined on the basis of valuation by a registered valuer
- The majority shareholders will have to deposit an amount equal to the value of the equity shares to be acquire by them, in a separate bank account to be operate by the company for payment to the minority shareholder
- The payment is require to be disburse to the minority shareholders by the company within a period of 60 (sixty) days which will be continue to be make to the minority shareholders who have not received the payment, for a period of 1 (one) year and
- The company will be require to deliver the equity shares to the majority shareholders upon receipt of the same
Further, the said Act also gives a right to the minority shareholders to make an offer
to the majority shareholders to purchase their shares and Mergers.